The poor housing approvals for March are bad news not only for the housing market, but also for renters and the cost of living.
Brokers Goldman Sachs JBWere pointed out this morning that the sharp fall in approvals, especially for houses, was not good news:
Today’s approvals report suggests that the supply-demand imbalance for Australian housing will continue to become more acute, which bodes poorly in an already difficult affordability environment. Furthermore, with the March approvals data mostly pre-dating the impact of the around 47pts in effective tightening since the start of March, there is good reason to be sceptical about a sustained rebound in approvals demand in the short- term.
Given these financial headwinds, and the extremely poor sentiment among prospective builders and buyers, we believe that a meaningful recovery in dwelling construction is likely to be delayed to 2009, with considerable ongoing upward pressure on rents in the meantime.
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Merrill Lynch was in the same vein:
The approval data over the March quarter confirms a material drop in housing demand. The aggressive rise in mortgage rates over the past six months and rising costs of new construction has extended the deterioration in housing affordability and cut demand.
Key leading indicators of new housing demand, including changes in interest rates and affordability, housing finance for new construction (-3.6% y/y) and survey data covering consumer’s willingness to purchase dwellings (-22.6% y/y) are all suggesting downside risks to building approvals and housing activity over coming months. Demand-side affordability constraints are outweighing the shortage of housing.
Which makes you wonder why the Rudd Government and various media commentators mainly concentrate on “working families” and people with mortgages, sometimes to the exclusion of renters.
The Reserve Bank has spent a lot of time and effort trying to explain that the phrase “mortgage stress”, as used by the media, is misleading if it is based on people who spend at least 30% of their income on mortgage costs: the bank makes the obvious point that this includes a whole group of people who spend more than 30% by choice because they can afford to: that is not stress.
Also included in this “stress” group are heavily geared property investors who are reaping the tax benefits of negative gearing, again through choice. They provide many of the properties available to renters.
As Rick Battelino, an assistant governor of the Reserve Bank, told a Senate Select Committee looking at housing affordability last week: “The rental market is currently very tight right around Australia. Vacancy rates are very low, at less than 1½ per cent on average across Australia. Rents are rising quickly. In the past year, newly negotiated rents rose by about 13%, while all rents outstanding (as measured in the CPI) rose by about 7%.”
And it is going to get worse because he says that:
The rental yield by itself was not sufficiently attractive to sustain the rate of investment, and the vacancy rate started to fall.
Even though rents have been rising quickly recently, over the longer term the cost of renting has risen less than the cost of buying a home. The price signals are therefore pushing households towards renting. On the other hand, the price signals facing investors are not conducive to increasing the supply of rental properties, as yields remain low and the prospects of capital gains uncertain
It is hard to see how equilibrium can be restored to the market until rental yields return to more normal levels. One way for this to be achieved would be for house prices to rise more slowly than incomes and rents for a period. Measures that lower the cost of adding to supply of housing, particularly low-cost housing, would be helpful in aiding the transition process.
This includes initiatives, such as that announced by the Australian Government in March, to help increase the supply of rental properties by giving tax subsidies to institutions investing in rental property.”
It is therefore ironic that the RBA’s anti-inflation campaign has, as the brokering firms noted, had the impact of cutting the number of new properties being built.
And there is an inflation cost: rents rose 7.1% in the year to March, according to the Consumer Price Index figures. That was one of the larger increases. With building approvals falling and therefore the number of properties available to rent falling, the upward pressure on rents won’t go away, nor will the upward pressure on the CPI from this area eases.